Current Price vs. Current Value

Too many people know the price of everything, yet the value of nothing. Is this true? Think back to all the times you witnessed the price of a stock you wanted to buy rise 100% over a year, but didn't go for it because you thought the price was too high.

A common mistake that many investors make, is sell a stock they own after making a little profit. Over the next few months, that same stock doubles or even triples in price. Many investors make such blunders because they have short-term investment goals. Why sell a valuable stock, just to make a quick profit? In the end you lose the potential to make larger long-term profits, while paying selling commission and taxes on your capital.

reasons to hold for the long term

Unless you invest in the market strictly because of the allure of the gamble, you should be investing for the long-term. Long-term is not necessarily defined as ten or fifteen years. It is defined as one year or more. If your perception as an investor changes from simply trying to cash in on the lastest fast moving stock, to a more defined outlook of 1 to 2 years, you will not suffer from bad timing and the accompanying heart palpitations from the stock market's gyrations.

So why should you think long-term? First, no one can guess the market's direction. No matter how astute you are as an investor, you cannot consistently beat the market. Second, every time you sell shares, you will pay taxes on your gains. Once you calculate the after-tax effect of selling your stock, you might realize that buying and holding may be a better option. Use the equity built up in your portfolio as collateral to purchase other shares in the company you own, in case the price falls and you don't want to sell any of your original shares.

your strategy

If you regularly invest in blue chip companies, you will eventually see the value of your portfolio grow over time, regardless of if you bought on a high or on a dip. Many investors confuse the process of building value with the analysis of a stock's current price. If you believe in the company and see potential for future growth, you should buy the stock regardless of its current price conditions. According to prevailing definitions of a bear market (a 20% drop in market indices), we have had 4 bears in 1999 alone, yet most markets are considerably higher at the end of the year. The moral here is not to worry about the market's tribulations.

The story of the tortoise and the hare can be applicable to investing, just as easily as it can to real life. Buy and hold, regardless of the market's movements, and don't let sudden drops in the price of a stock scare you if the fundamentals of the company essentially remain the same.

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